Beyond NAFTA: A Forum

Toward a North American economic community.

May 10, 2001

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At the Quebec Summit of the Americas, President Bush said he wants a free-trade pact for all the Western Hemisphere modeled on the North American Free Trade Agreement. But NAFTA is a deeply flawed guide to economic integration, and especially disappointing for those in Mexico worried about the growing development gap not just between their country and the United States but also within Mexico [see Jerry W. Sanders, “Two Mexicos and Fox’s Quandary,” February 26]. Even before he took office, Mexican President Vicente Fox offered a bold program to help close this gap, but many of his more promising ideas–for regional development funds and increased infrastructure investment–have since fallen off the US-Mexico agenda. Indeed, what emerged from the Fox-Bush February meeting was a potentially new corporate bargain: opening up Mexico to US oil companies in return for regularizing Mexican migrant labor in the United States.

To stimulate thinking on an alternative agenda, The Nation invited Walter Russell Mead, a senior fellow at the Council on Foreign Relations, to offer his ideas, and we solicited responses from Jeff Faux, president of the Economic Policy Institute, and Angelo Falcón, senior policy executive at the Puerto Rican Legal Defense and Education Fund, a national civil rights organization. –The Editors

WALTER RUSSELL MEAD

Vicente Fox’s election as president of Mexico may be one of the most important legacies of the North American Free Trade Agreement. But for Fox–and for the many US, Mexican and Canadian citizens who went to protest at the recent Quebec Summit of the Americas–NAFTA is unfinished business. NAFTA may have helped break the stranglehold on power of the ruling Institutional Revolutionary Party (PRI), paving the way for Fox’s election. It also may have greatly expanded trade between the United States and Mexico, linking Mexico more closely to the successful US economy.

But for all these accomplishments, NAFTA has failed to raise the living standards of most Mexicans, and it has so far failed to deliver the large-scale flow of capital Mexico needs to create jobs for the many young Mexicans entering the labor force. Real wages in Mexico are 26 percent below their 1981 levels, and dropped steadily after the inauguration of NAFTA. Hundreds of thousands of Mexicans still cross US borders each year in a desperate search for work.

Not satisfied with NAFTA as it is, Fox soon after his election offered a bold program for making NAFTA into something more like a North American economic community. Fox called for a freer flow of immigrants to the United States, generous development funds and a new multilateral approach to stopping the drug trade. Across the border in this country, these ideas were met with a dismissive silence, reflective of a fatigue born of the bitter struggles over NAFTA’s passage in 1993.

Yet it would be a mistake to turn our backs on the goal of a more prosperous and democratic Mexico or on Fox’s ideas for a new partnership. Even if his proposals in their current form are political nonstarters, there are other things the United States, Canada and Mexico can do together that would dramatically change Mexico’s economic outlook and do for Mexico what the European Union did for countries like Portugal and Spain: Give ordinary Mexicans the chance to build something like a First World standard of living.

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§ Massive infrastructure investment. The first thing Mexico needs is private investment in highways, water-treatment facilities, hospitals, power plants and airports. In Europe they did this with taxes. That won’t, of course, happen here. But we can accomplish the same goal by persuading private capital to invest in Mexican infrastructure projects on a massive scale. So far, the efforts have been disappointing. Corruption makes projects more expensive than they should be, and Mexico’s poverty makes it hard to make money from infrastructure.

We can make these investments more attractive in two ways. First, just as the US government encouraged the rail companies to build transcontinental lines by awarding them land along their routes, Mexico could be encouraged to give construction companies the right to develop land beside, say, the exit ramps of a new freeway or next to a new airport. Doing so would help make these investments profitable. To cut down on corruption, we could create NAFTA boards to oversee and audit these projects. Mexico, the United States and Canada would each name one-third of the board members. Giving Mexico an equal say with its two NAFTA partners would preserve the country’s pride; giving a majority of seats to non-Mexican partners would limit the ability of Mexican politicians to siphon off the money.

To cut costs further, NAFTA countries could jointly guarantee the bonds of companies investing in approved infrastructure projects. This would lower total costs and make the investments more profitable. It is easier to win political support for loan guarantees than for direct aid programs, and several additional steps could be taken to gain the necessary political support for such an infrastructure initiative. Thus, for example, we could require that the projects funded under this initiative meet certain environmental standards and that contractors participating in them observe basic labor rights. Some portion of the loan guarantees should be reserved for projects that address serious environmental problems in Mexico, ranging from water purification to waste disposal and the adoption of more environmentally friendly technology in the power industry. In addition, we could require that a proportion of the equipment and materials used by the projects be purchased in the United States and Canada, creating new markets for US- and Canadian-made goods–and new jobs for US and Canadian workers. Tax revenues and other benefits from these orders and jobs would help offset the cost of the loan guarantees.

Labor hated NAFTA, but this NAFTA II approach is more worker-friendly. With more jobs in all three NAFTA countries, new infrastructure in Mexico, improved environmental and labor standards, and little or no cost to US, Canadian or Mexican taxpayers, what’s not to like?

§ Regional retirement program. Along with such an infrastructure program, the three NAFTA countries could embark on a regional retirement program–a series of measures aimed at facilitating and promoting the voluntary relocation of retired US and Canadian citizens to Mexico. In the next thirty years, more than 100 million Americans will turn 65. Many will have a hard time affording a comfortable US retirement. One cheap and relatively easy part of the solution would be to let retirees follow the sun over the border by extending their Medicare coverage to Mexico, where the cost of living is much lower.

By reimbursing Medicare-eligible patient expenses–perhaps at a discount to high US rates–at inspected and approved healthcare facilities in Mexico, and by negotiating with the Mexican government to insure adequate legal protection for retirees and their property, the United States could open the doors for, ultimately, millions of aging Baby Boomers to enjoy affordable and comfortable retirements south of the border. The effects on Mexico would be transforming: If 10 percent of the new retirees were to go to Mexico, the annual economic boost of their spending and Medicare payments alone would be roughly equal to 50 percent of Mexico’s current GDP. Mexico would also gain from an increased demand for both skilled and unskilled healthcare workers.

§ Currency reform. There’s one more thing the United States could do for Mexico. Increasingly, many Mexican businessmen, including several high-level Fox appointees, are talking about “dollarization”–getting rid of the Mexican peso and making the US dollar legal tender in Mexico. The main reason for doing that would be to bring down interest rates: A weak, inflation-prone peso forces Mexicans to pay much higher rates than Americans. It is virtually impossible to start a new business or expand an already existing one without access to reasonably priced credit, and this, as Fox knows, has stunted Mexico’s economic development.

But dollarization is not just about business. High interest rates mean Mexican families can’t do something Americans take for granted: get a mortgage. Helping Mexico dollarize would allow millions of Mexicans to join the middle class and build their own homes. That in turn would create new jobs in Mexico–and support Mexican economic growth that doesn’t depend on exports to the United States. The costs again would be minimal, and the benefits huge.

Dollarization is not the only possible approach to Mexico’s currency problem. Like all approaches to currency issues, it has problems, and some of the problems are serious. Other alternatives exist: Mexico, for example, could (with US assistance) help establish a regional currency zone, with willing participants from Central America and the Caribbean.

The decision on currency is ultimately one that Mexico must take; the United States should stand ready to work with the democratic Mexican government to support any feasible Mexican initiative that helps ordinary people and small businesses gain the kind of access to credit markets that is currently largely restricted to big business and the elite.

§ Legal reform. For any kind of currency reform to benefit ordinary Mexicans, it must be linked to legal reforms that give Mexico the basis for a credit system that people can use for purposes like home mortgages and small businesses. In Mexico, as in many countries with strong traditions of one-party rule, courts and laws do a poor job of protecting the rights and property of average citizens. This must change. A wide range of reforms are needed in how laws are written and how courts work. As Mexican politics shifts onto a more democratic path, legal reforms to protect the rights and property of ordinary citizens, and to provide the legal basis for Mexican versions of institutions like Fannie Mae, will become a top priority. The US government should lend its wholehearted support to these reforms and encourage the international financial institutions to provide both technical assistance and financial help as Mexico moves toward democratic rather than pure neoliberal reform.

This four-part program–infrastructure investment, Medicare transportability, currency reform and legal reform–would create millions of Mexican jobs, raise wages and living standards, cut illegal immigration, improve the environment, advance labor standards and create new jobs in the United States and Canada. No giant sucking sound, no new taxes. As surely as it once won its independence, Mexico will someday win its war on poverty and join the First World. Already, Mexico today has a more productive economy and a larger proportion of well-educated workers than did many members of the European Union after World War II. With a little help from its friends, Mexico can join the First World for keeps much sooner than most people think–quite possibly before the Gen Xers head south to retire.

JEFF FAUX

Walter Mead is right that the election of Vicente Fox opens up the possibility for a new deal with Mexico, one that reflects the reality of the converging economies of North America. But his “NAFTA II” does not sufficiently address the critical failure of NAFTA I–the weakening of economic democracy in all three countries.

All markets are nested in political arrangements that set the rules. The rules created by NAFTA are imbalanced; they encourage capital mobility by extending trinational protection to investors, while protections for workers and the environment are left to national governments, and consequently eroded by the increased competition for investment. One result has been a rise in inequality and insecurity among working people in all three countries–especially in Mexico, where the rich have gotten a lot richer while some 40 percent of the population live on $2.80 a day or less.

Mexico will certainly need more foreign capital to close the gap in living standards between itself and its neighbors. But it is already host to enormous amounts of investment that have failed to trickle down. Moreover, much of Mexico’s public infrastructure problem stems from chronically deficient public revenues in a country where the rich–foreign and domestic–don’t pay taxes. As a recent New York Times article describing conditions in the border city of Acuña put it: “Mexican workers earn such miserable wages and American companies pay such minimal taxes that its schools are a shambles, its hospital crumbling, its trash collection slapdash, and its sewage lines collapsed. Half of Acuña’s 150,000 residents now use backyard latrines.”

Mead’s notion that presumably more virtuous US and Canadian bureaucrats sitting on a trinational board would “limit the ability of Mexican politicians to siphon off the money” reveals a naïveté about the root cause of corruption in Mexico. Mexican public officials are not intrinsically less honest than their counterparts to the north. Seven decades of one-party PRI rule created entrenched private oligarchies that treat the government, including the military and police, like a branch of the family business.

For example, credit for small business and consumers did not dry up because courts suddenly decided not to protect private property. Government banks were sold off to oligarchs who drained their assets. As a result, despite the influx of foreign capital, interest rates in Mexico are among the highest of the major countries in Latin America or Asia. These new “market oriented” banks are now getting a massive government bailout, the cost of which is crowding out desperately needed public expenditures on education, health and infrastructure.

To a large extent, Mexico’s crony capitalism has rested on PRI-controlled trade unions and farmer organizations that have refined the “sweetheart contract” to a fine art. In some cases, workers do not even know the name of the union that collects their dues and have been told by the Labor Ministry that they have no right to the information. Workers who have tried to organize independent unions are harassed, beaten and sometimes killed.

Mexico’s system has long been politically supported by investors north of the border. Whatever it cost them in bribes, the system has been more than made up for by providing a cheap, compliant labor force.

Last year’s defeat of the PRI’s candidate for president by Fox–former CEO of Coca-Cola Mexico and leader of the National Action Party (PAN)–has crippled the PRI’s power but not yet changed the system. The PAN itself is highly conservative and business-oriented, the PRI maintains control in most Mexican states, and economic and military power remains in the hands of the oligarchs.

But still, Fox appears committed to making the country more democratic. Moreover, he has proposed that NAFTA take as a model the European Union, in which labor and social protections are embedded in the common market. This opens up possibilities for democratizing the NAFTA relationship. A connected debate in all three countries over the future of the evolving continental economy could create a cross-border constituency to counterbalance the powerful but narrow set of political interests that supported NAFTA I.

Indeed, Fox has begun practicing his own version of new continental politics. He has declared his intention to be the leader not only of Mexico but of the millions of Mexicans living in the United States. In his February meeting with George W. Bush, Fox put on the agenda the treatment of Mexican workers in the United States. This raises a question: If the treatment of Mexican workers in the United States is a continental political question, why not the treatment of Mexican workers in Mexico? Or the treatment of US workers in the United States, where the erosion of workers’ rights was the subject of a recent Human Rights Watch report?

The next stage for NAFTA therefore should focus on economic democracy–establishing continental standards for labor and human rights, and making them enforceable. As an incentive, the United States and Canada could commit themselves to sustained development assistance to Mexico for education, infrastructure and environmental cleanup–not just along the US border, but investments in clean air and water in Mexico City and other places in the interior, where pollution is even more threatening to people’s health. An increase in legal immigration linked to greater Mexican efforts to stem illegal crossings could also be offered. And the United States could forgo the annual ritual of certifying that Mexico is making an effective good-faith effort in the war against drugs. Inasmuch as neither Republicans nor Democrats have any intention of decertifying Mexico, the process serves no useful purpose. It humiliates Mexico and perpetuates the myth that the source of the US drug problem lies there rather than within US borders.

For its part, Mexico should commit itself to enforceable labor rights–including trade-union democracy–and workplace and environmental standards that would rise toward US and Canadian levels as Mexico’s per capita income rises. The problem of judicial corruption in Mexico can at least partially be addressed by “continentalizing” the enforcement of these standards, just as we have done for the protection of investor rights. Citizens of any country would be able to bring action against violators in the courts of any other, and trade sanctions could be invoked against both violating companies and violating governments.

This kind of proposal could attract a trinational constituency. For Canadians, a social vision for NAFTA would help protect their generally higher social standards from erosion. For both Canadian and US labor unions, the prospect of an independent union movement in Mexico, allied with a movement for better conditions throughout the continent, could be particularly attractive. In Mexico, it would be in Fox’s political interest–as well as that of Mexico’s third party, the left-of-center Democratic Revolutionary Party–to break the power of the old PRI-dominated unions. Certainly, among average Mexican families, the combination of social investment and an elevation of workers’ rights would be popular.

Whatever their possible merits, dollarization and the promotion of retirement homes in Mexico should not be the next priority for North American economic integration; more urgent is a better deal for the continent’s workers.

ANGELO FALCÓN

Walter Russell Mead is no fan of NAFTA, and he sees a need to go beyond outmoded traditional left proposals. But his attempt to outline a progressive yet pragmatic approach to “fix” NAFTA in ways that would help “give ordinary Mexicans the chance to build something like a First World standard of living” seems like a surrender to the very forces that created the problems in the first place.

His four-point program of infrastructure investment, regional retirement, currency reform and legal reform appears to be an effort to come up with a politically marketable approach in the United States for supporting Mexico’s economic development. The problem he seeks to confront head-on is overcoming the “dismissive silence” in the United States that Mexican President Vicente Fox received in response to his reasonable proposal for a more open North American common market.

One problem with Mead’s approach is that he offers such a dismal picture of Mexican society that he undermines his own arguments. This is a society where “corruption makes projects more expensive than they should be,” where “poverty makes it hard to make money from infrastructure” and where “courts and laws do a poor job of protecting the rights and property of average citizens.”

While he argues that his program would address these issues, how this would happen isn’t clear. He talks about stemming corruption through monitoring by “NAFTA boards” that should include Mexico to “preserve the country’s pride”; he would promote profitability through an extensive program of corporate giveaways; he would address Mexican poverty by displacing/”enriching” Mexicans with US and Canadian retirees lured to Mexico with social welfare incentives. Moreover, the recommendations are couched in terms that may be offensive to many Mexicans.

The analysis, like much of what now passes for a pragmatic progressivism, also suffers from its ahistorical nature. There is no discussion of the US role in Mexico’s underdevelopment or of how the United States benefits from this economic asymmetry. This amnesia conveniently allows for an evasion of responsibility and for a lack of understanding of how we got to where we are today. US foreign policy becomes a neutral, pluralist process in search of rational proposals. Social, class and national struggles become nuisances to be explained away rather than the powerful forces of much-needed change that must be understood and harnessed.

Mead might usefully have focused on the reasons behind the “dismissive silence” President Fox’s proposals encountered from US policy elites. Why should anybody be listening to Mead rather than the democratically elected president of Mexico? For an answer to that question, Mead will have to crack open some history books.

Angelo FalcónAngelo Falcón (angelo_falcon@prldef.org) is senior policy executive with the Puerto Rican Legal Defense and Education Fund, a private, nonpartisan civil rights organization based in New York City.